Understanding Cryptocurrency Regulations for Businesses

These crypto businesses need to ensure that they understand what types of activities are regulated, and they need to navigate those catagories carefully because they will face penalties, both reputation-wise and financially, if they fail to do so.

Furthermore, exchanges, wallets and crypto-trading are vulnerable to more regulation around them next year. It is quite possible to see KYC (know-your-client) demands and AML (anti-money-laundering) rules becoming even more strict.

Stablecoins will come under increased scrutiny to ensure they’re always backed by some form of real, tangible asset, and the honest utility of any security token will be attempted by regulators and other third parties.

Know Your Customer (KYC)

Know-your-customer (KYC) rules help prevent illicit use of digital payment channels, and vulnerable mobile money channels are seen as a safe haven for money laundering, terrorist financing, tax-avoidance schemes and fraud. KYC ensures that organisations take all necessary steps to verify the identity of customers or users. Companies that grow beyond a certain size have to abide by KYC rules, such as banks, credit unions, financial companies and any cryptocurrency exchanges that deal in meaningful amounts of money. Identification verification traditionally consists of document verification, interviews and identity checks. It is also important to screen the customer against watchlists and sanctions lists (is this customer suspected to have ties to terrorism, organised crime or corruption and what steps, if any, need to be taken?). We have the compliance solution for your business – use our KYC system with transaction monitoring to guarantee compliance and protect you from public embarrassment and reputational damage! Identity verification and compliance solutions are very important in the future of crypto.

Anti-Money Laundering (AML)

Billions of dollars every month flow through crypto-currency transactions to buy illegal merchandise such as forgeries, to launder money, to exploit human trafficking, even to support terrorists. Such transactions make it easy for criminals to conceal the origin as well as the recipient, to reap the benefits of their crimes without fear of retribution. Nevertheless, the emergence of the regulatory landscape for cryptocurrency has come to a turning point, with many regulators implementing new requirements to mitigate the threat that cryptocurrency poses globally. Exchanges and other VASPs must abide by strict AML policies to stay in compliance and avoid fines or penalties for violating these policies. These include Customer Due Diligence (CDD), transaction monitoring and reporting suspicious activities to the relevant authorities – to prevent financial crimes such as terrorist financing and other illegal activities. In addition, they must ensure that their internal control systems and staffing can respond and keep up with the regulatory changes, which might necessitate significant coding or technological upgrades. Ensuring a core competency to monitor regulatory changes means adopting the resilience to contend with an ever-fluid regulatory environment.

Security Token Offerings (STOs)

The STO (Security Token Offering) is a legal, controlled form of tokenisation where companies can also issue digital tokens and obtain funds from investors, who can acquire rights in real-world assets such as real estate, precious metals or works of art, in turn stored on blockchain networks. Regulation of STOs is also stricter than that of ICOs: in most cases, your compliance with the fundraiser should undergo KYC and AML checks, and is subject to adherence with securities laws that are applicable to your operating country. When investing in an STO project as an STO investor, you should do your homework on any proposed projects and teams, reading the team’s whitepaper to know what assets are being tokenised, and then valuing token issuance based on the type of those assets; then take a look at the minimum investment amount of potential offerings, and the valuations relating to the respective tokens on sale, before making an investment decision on your part to decide whether this project meets your investment goals. The Securitize platform or STOmarket can guide investors to match up potential offerings with their own investment criteria.

Tax Reporting

Regulations announced in 2021 require brokers to report digital asset trades and provide cost basis data to clients (comparable to cash payment reporting on Form 8300 for payments over $10,000). This rule broadens the existing broker information reporting requirements to bring in to the ambit most cryptocurrency exchanges/platforms, custodians and other digital asset marketplaces – which are apparently not brokers – but the industry participants suggest that this definition is far too expansive and might capture many non-custodial digital asset middlemen such as protocol development companies, non-fungible token (NFT) marketplaces, and ancillary service providers. Tax-filing for cryptocurrency profits is definitely not easy – unless you’ve prepared yourself for what’s about to come along. This includes keeping a record during the year and consulting a Certified Public Accountant, as well as familiarising yourself with tax legislation in the world’s most important territories. Staying up to date with all regulatory changes ensuing in the cryptoverse is very crucial to build a defence against upcoming compliance hazards.

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